For Social Security's nearly 65 million beneficiaries, October is the most anticipated month of the year. It's when the Social Security Administration announces all the changes for the upcoming year. This includes an increase in the full retirement age, higher taxation for upper-income earners, and a boost in the retirement earnings test exemption amounts.
Among all these changes, none is more important than Social Security's cost-of-living adjustment -- the benefit increase passed along to recipients each year to account for inflation.
It's the most important time of the year for Social Security recipients
Since 1975, Social Security's COLA has been determined by tethering the program to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W has more than a half-dozen major spending categories and dozens upon dozens of subcategories, each with their own respective weighting. Every month, the Bureau of Labor Statistics reports the CPI-W as a single number that -- when compared to the previous year -- allows for the quick and clear determination of whether prices for a predetermined basket of goods and services are rising or falling.
Social Security's COLA doesn't take into account readings from the full year. Only CPI-W readings from the third quarter of the current year (July to September) and the third quarter of the previous year matter in the COLA calculation. The other nine months can help identify trends, but won't determine whether or not Social Security beneficiaries will get a raise in the upcoming year.
If the average CPI-W reading from the third quarter of the current year is higher than the average CPI-W reading from the third quarter of the previous year, beneficiaries get a payout boost. This "raise" is equal to the year-over-year percentage increase in the average CPI-W, rounded to the nearest tenth of a percent. Since the BLS' September inflation report is the final piece of the puzzle needed to calculate COLA, the second week of October is always when beneficiaries find out if they're getting more money.
How much are monthly benefits really going up in 2021?
In 2021, beneficiaries are indeed getting a raise. Based on the BLS' September inflation report, Social Security recipients can expect their monthly benefit to increase by 1.3% come January. What does that actually mean for the average Social Security beneficiary? Let's take a closer look.
Of the roughly 64.8 million people currently receiving a benefit, 46.1 million are retired workers. This isn't a surprising figure given that Social Security was designed to protect elderly individuals who could no longer financially provide for themselves. By December, the Social Security Administration anticipates the average retiree will net $1,523 a month in benefits. A 1.3% COLA will yield the average retired worker $20 more per month in 2021, or $1,543.
The next-largest group of recipients behind aged beneficiaries is the disabled. The SSA estimates that 8.25 million disabled workers will bring home an average of $1,261 a month by December. Applying a 1.3% COLA to this figure increases what the average disabled worker receives by approximately $16 a month to $1,277.
Social Security also protects survivors of deceased workers. Close to 5.9 million people were receiving a survivor benefit as of September. Although the SSA didn't provide an estimate for the average survivor benefit in December, my personal expectation is that it'll increase from $1,225.96 in September 2020 to around $1,229 by December. Tacking on a 1.3% COLA would yield a monthly payout increase of roughly $16 to $1,245 next year.
Social Security's good news/bad news in 2021
Considering that the coronavirus disease 2019 (COVID-19) pandemic caused the prices for many goods and services to fall between March and May, it's actually a bit of a surprise that beneficiaries are receiving a COLA at all. A surge of inflation from food and price upticks in shelter and medical care services are responsible for the 1.3% raise that Social Security recipients will receive in 2021.
While any positive COLA is better than no COLA at all, there's a downside here. A 1.3% COLA ties for the second-smallest positive COLA since 1975, and it perpetuates what's been an 11-year stretch of anemic inflationary increases. Since 2009, the average annual COLA has only been 1.4%, with three of the past 11 years featuring no COLA at all (i.e., deflation occurred).
The issue for Social Security beneficiaries, and especially seniors, is that a 1.3% COLA doesn't even come close to outpacing their medical-care services and shelter inflation. This ongoing series of low or nonexistent COLAs means a continued loss of purchasing power for retired workers.
Again, it's good news that recipients are getting a COLA in 2021. But when push comes to shove, it'll almost certainly be another year where the real value of a Social Security dollar declines.